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Maxing out 401K contributions the (mid-)year I retire in 2026
It occurs to me that since I will only be working half of 2026, and retiring that year. I should double my 401K contribution to reach the maximum for 2026. I currently max out every year, including catch-up contributions.
My second thought on this topic is to put it all into Roth, as it will work out better in the long term IRT Roth conversions.
If Roth 401(k) is available in your company, it would be to your advantage to do so. Pay with after tax dollars now and future appreciation on the Roth account will be tax-free. The company matching $, however, still go your traditional 401(k). Maxing out would work before retirement.
You may also add to your personal Roth IRA if your income is not one that is above 36%+ bracket. 2025 limit is $7,000 plus $1,000 catch-up. You have until April 15th for 2025 contribution. You can do that again next year before retirement.
Great thoughts. I considered switching this year, but I am already bumping against the next tax bracket due to liquidating an inherited IRA in 2025, for which we decided to take the hit now. Our lower income years will start in 2026, when I only work 1/2 a year. And onward, as we only have SS, my wife's small pension and investment income. I will accept the lump sum for my own pension, frozen since 2010.
We do already max out Roths for both of us each year. And we want to start more aggressive Roth conversions in 2027 and onward. That will be 5 years of Roth conversions before RMDs. We are both 66 this year. RMDs are certain to push us into the 24% bracket, so I am looking at future Roth conversions to mitigate that.
I know that going all-in on conversions is the best move, but it is still a bit overwhelming. The choice seems to be limiting the amount of income at the 24% level, as opposed to avoiding it altogether. If we are not careful, we could end up with income in the 32% bracket, eventually.
I was prepared to retire at 62, then came covid and work-from-home. It became so easy that I just stayed on the job. This has led to 5 additional years of Roths, waiting on SS until FRA, 5 more years of pay and 5 more years of maximum 401K contributions.
So, my "compromise" is to double up in the first half of 2026, all into Roth, and start Roth conversions the following year, when I no longer have a salary. I know that I should have started this earlier.
Since you're retiring mid-year, you don't have any choice in the matter. You have to front load to get full benefit from your 401(k). But others who are working a full year, have a choice whether to front load (if they're maxing out).
The plus with front loading is that the money is sheltered for an additional haff year or so of growth (one hopes). The potential minus is that some employers limit matches monthly. So instead of adding a 1/12 of an annual match in each of twelve months, an employer may only add 1/12 of a match for the six months that an employee contributes. Even though the employee is doubling up in the first half year. AFAIK, most employers' plans don't have this "gotcha", but some do.
I'm a fan of gradual conversions. It both reduces RMDs and increases the amount of money that's tax-sheltered. (Instead of sheltering pre-tax dollars you're now sheltering higher value post-tax dollars moved to the Roth.)
It doesn't matter whether you contribute pre-tax and convert in the same year or you contribute directly to a Roth (401K or IRA). The numbers come out the same.
If it helps, think in terms of contributing pre-tax and then calculating how much you would convert this year and/or next year.
Great. Thanks. No employer match to 401K. It all goes into a cash account plan. Same effect though, I will not get the full years contribution from them. My main impetus for the Roth build/conversion is to reduce RMDs, as you mentioned. I may also start them before age 73, as they could get out of hand quickly, especially when one of us passes and we have to file as "single".
Related, my circumstances with retirement are very unique. I am the only SME left in my company for this product line, and a very large customer is involved. They have asked me to stay until the last piece of equipment is retired from the customer's network, and until we shut down our lab dedicated to this product. Essentially, they know that I have very little to do and do not care. We have a signed support contract worth millions.
How they handle my leaving will be interesting. If they were to send me packing once the equipment is all gone, they would be on the hook for severance, and I would be entitled to unemployment pay. My guess is that they offer me a position on an associated product line, which I have no interest in pursuing. Thus, causing me to voluntarily retire. Which is fine, this whole situation has been extremely lucrative for myself and my wife.
Comments
You may also add to your personal Roth IRA if your income is not one that is above 36%+ bracket. 2025 limit is $7,000 plus $1,000 catch-up. You have until April 15th for 2025 contribution. You can do that again next year before retirement.
If you go for maxing regular 401k, you may gradually convert to Roth IRA in lower income years.
Mixing up may be a good compromise.
And why not start in 2025 - there are few months still to boost 401k contributions.
We do already max out Roths for both of us each year. And we want to start more aggressive Roth conversions in 2027 and onward. That will be 5 years of Roth conversions before RMDs. We are both 66 this year. RMDs are certain to push us into the 24% bracket, so I am looking at future Roth conversions to mitigate that.
I know that going all-in on conversions is the best move, but it is still a bit overwhelming. The choice seems to be limiting the amount of income at the 24% level, as opposed to avoiding it altogether. If we are not careful, we could end up with income in the 32% bracket, eventually.
I was prepared to retire at 62, then came covid and work-from-home. It became so easy that I just stayed on the job. This has led to 5 additional years of Roths, waiting on SS until FRA, 5 more years of pay and 5 more years of maximum 401K contributions.
So, my "compromise" is to double up in the first half of 2026, all into Roth, and start Roth conversions the following year, when I no longer have a salary. I know that I should have started this earlier.
I do appreciate all feedback.
The plus with front loading is that the money is sheltered for an additional haff year or so of growth (one hopes). The potential minus is that some employers limit matches monthly. So instead of adding a 1/12 of an annual match in each of twelve months, an employer may only add 1/12 of a match for the six months that an employee contributes. Even though the employee is doubling up in the first half year. AFAIK, most employers' plans don't have this "gotcha", but some do.
I'm a fan of gradual conversions. It both reduces RMDs and increases the amount of money that's tax-sheltered. (Instead of sheltering pre-tax dollars you're now sheltering higher value post-tax dollars moved to the Roth.)
It doesn't matter whether you contribute pre-tax and convert in the same year or you contribute directly to a Roth (401K or IRA). The numbers come out the same.
If it helps, think in terms of contributing pre-tax and then calculating how much you would convert this year and/or next year.
Related, my circumstances with retirement are very unique. I am the only SME left in my company for this product line, and a very large customer is involved. They have asked me to stay until the last piece of equipment is retired from the customer's network, and until we shut down our lab dedicated to this product. Essentially, they know that I have very little to do and do not care. We have a signed support contract worth millions.
How they handle my leaving will be interesting. If they were to send me packing once the equipment is all gone, they would be on the hook for severance, and I would be entitled to unemployment pay. My guess is that they offer me a position on an associated product line, which I have no interest in pursuing. Thus, causing me to voluntarily retire. Which is fine, this whole situation has been extremely lucrative for myself and my wife.